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Some truths about arms dealing

The Economist has published an extensive article about “offsets”, the side deals that are made to grease the wheels of the international arms trade. We all know that outright bribery has been, and perhaps still is, commonplace in the world of arms dealing, but no one would argue that is a legitimate practice. By contrast, offsets are legal: in order to win a contract to supply weapons to a nation state, an arms company may be required to make a sizeable investment in some unrelated, civilian project in that country. For example, Raytheon had to set up a shrimp farm in Saudia Arabia, while cash from various arms companies has funded a gas pipeline and residential beachfront property development in the UAE. Such offsets can be worth billions of dollars.

One truth then (the one the parties involved like to publicize) is positive: arms companies are helping to build the civilian infrastructure of developing countries; indeed, the procurement officials and ministers making the deal can truthfully claim to have attracted substantial foreign direct investment to their country.

On the other hand, it would be naive to think that arms companies are simply giving this money away. It is a cost of doing business with certain countries, and it is undoubtedly factored into the pricing for those countries. The bill is passed on to the customer. According to the Economist, “Politicians and officials in procuring countries know that they are paying the bill through padded prices, but they accept this because offsets give them some grand projects to trumpet and sometimes provide palm-greasing opportunities”.

So the alternative truth is this: the procuring nation (sometimes quite a poor nation) is in fact stumping up the cash for investment into its own development projects, while the arms seller gets the credit (and the arms deal).

This might not be all that terrible, so long as the projects receiving investment are worthy of taxpayers’ money. But who chooses them? Might they be pet projects of the procuring minister/official? Might they benefit some business interest of the procurer? Might some financial incentive be offered to choose one project over another? The opportunities for corruption are rife in such a system. Various cases of not-quite-outright-bribery being dressed up as offset deals are currently being reviewed by prosecutors, including one involving EADS selling Eurofighter planes to Austria. And the outcomes are, it seems, frequently poor. That Saudi shrimp farm went bust.